Irvine Co. Vs. Smith : Sparks Flew and Became an Inferno When Don Ran Into Joan


It was an odd place to find a billionaire, this rented room filled with folding chairs in a nondescript suburban office building.

A Southern Californian, he wasn’t used to the bare trees of this prosperous Detroit suburb, to the brisk autumn air and the bulky trench coat he was shrugging off before taking the stand in the case of the Irvine Co. vs. Athalie Irvine Smith and Athalie R. Clarke.

He was also unaccustomed--though it seldom showed--to being hauled into court halfway across the country and forced to bare the inner workings of his immensely powerful company, which until now had been kept closely shielded from nosy outsiders.

Yet there he was, sitting through eight long days of cross-examination during which he was questioned about matters as large as an unseemly squabble with one of his business partners that helped him take over the company and as small as the hand-scrawled notes he made while talking on the telephone.


No one could know when he finished testifying in November, 1987, that this case would continue for the next three years. Nor could they know that--unlike so many other moments in his life--when it ended it would not be an unqualified success for Donald L. Bren.

That became clear Monday when a Michigan referee ruled that Bren’s company owed Smith $149 million for her stock in the firm, 31% more than he agreed to pay seven years before. Both sides claimed victory, but both also got less than they wanted.

The case was given docket No. 83-27001-CZ, differentiating it from the thousands of other disputes that pass through the Circuit Court of Michigan in Oakland County. The first two numbers denote the year--1983--when the case was filed.

That year, Bren became almost sole owner of one-sixth of Orange County, then about 67,000 acres smack in the middle of one of the fastest-growing suburbs in the nation. He acquired it from a handful of extraordinarily rich and powerful businessmen who had bought the family company that owned the land.


The company traced its history back to the 19th Century, when Los Angeles was a village and to the south, vast, unbroken seas of mustard grass undulated over much of what would become Orange County. James Irvine was a prosperous San Francisco merchant in 1864 when he paid a mere $25,000 for 108,000 acres, part of three Spanish land grants whose owners had fallen on hard times. By the time the Irvine Co. was incorporated in 1894, the ranch was a vast and fertile farm, producing oranges, cattle, lima beans. The family was rich.

But by the late 1950s, it was clear that the family had a potentially much greater source of wealth on its hands: The postwar housing boom that was moving south from Los Angeles. While it hadn’t yet reached the ranch, which stretched 22 miles across the middle of Orange County, it was obvious that it eventually would.

About the same time, the family named to the board James Irvine’s great-granddaughter, 24-year-old Athalie Irvine Smith, who goes by the name of Joan. At a time when women were supposed to stay out of business matters, she accused the company’s managers of self-dealing and inept management that kept her stock dividends low.

While most developers built one neighborhood at a time, the company planned to develop its thousands of acres on a scale unheard of: It would build an entire city, with its own business district, shopping centers, churches and roads. Built from scratch less than 30 years ago, the city of Irvine now has 100,000 residents.

The company’s city-building days are behind it, but it still builds on a staggering scale--whole communities with thousands of homes and their own shopping centers and schools, all planned right down to where the churches will go, all part of Bren’s vision of Southern California.

“Our work has attracted attention around the world,” Bren recently boasted in one of the employee publications churned out by the company’s public relations staff.

And it also attracted the watchful eye of Smith. She bickered with the company through the 1960s and 1970s. In 1977, she forced the family’s philanthropic foundation to sell its 50% of the company’s stock. Feisty and tough, she envisioned turning it into a public company that she could control and run as a family enterprise much as her grandfather had.

But that wasn’t to be. Mobil Oil was interested in buying; so was Canadian developer Cadillac Fairview. Smith had to join a group of the nation’s wealthiest men--investment banker Herbert Allen Sr., shopping center magnate A. Alfred Taubman, auto heir Henry Ford II and others--to outbid Mobil and buy the company for $377 million.


Despite the spirited bidding, Taubman later told a national magazine: “We bought it well under market value.” He was right. The land was so valuable that it paid for itself within a few years.

The group also invited in a local home builder who wasn’t quite yet in their league--an ambitious young fellow named Don Bren.

While Smith spent her summers riding horses over the family ranch a few miles away, Bren was spending his in Newport Beach.

There are some interesting similarities between Bren and Smith: Outwardly, both were quintessential Southern Californians, blond and athletic, products of easy postwar affluence.

But there were differences too. Smith represented an older culture, old California money earned from land and farming; Bren--whose father was a Hollywood producer--represented the new money pouring into Southern California from the movies. Smith skipped college and once piloted a small plane across South America on her honeymoon; Bren joined the Marines after college and began building houses when he was discharged in the late 1950s, about the same time that Smith began making life miserable for the Irvine Co.'s managers.

Now, both in their late 50s, they are two of Orange County’s richest people: she the subject of an admiring profile in People magazine and he one of the wealthiest men in America with a fortune estimated by Forbes magazine at $1.8 billion. The long fight has fascinated some and repelled others, who see the dispute as a pointless tussle between two people who are already fabulously wealthy.

After awhile, indeed, the kind of numbers that got tossed around in the protracted legal battle began to seem unreal, to blur. But to grasp the essence of the case, consider just a few of them:

In 1977, Smith sold her 22% of the Irvine Co. to Taubman and the others for $72 million, enough to land her for a time on Forbes magazine’s listing of America’s wealthiest people. The group then allowed her to buy 11% of the new company for $3.3 million, or $6,000 a share.


In 1983, a scant six years later, Bren offered the other shareholders $200,000 a share to sell--more than 30 times the $6,000 a share they had paid. The offer was based on the company being worth about $1 billion. Most of the shareholders took the money.

But Smith thought the ranch was worth much more. Eventually, her experts would come up with a high-end estimate of $3.3 billion. For her 11% of the stock, she said that she wanted $330 million, or $600,000 a share--a hundred times more than what she paid for it. By the time the trial rolled around in August, 1987, she was demanding--with interest--$500 million, an amount that could stagger even a concern as rich as the Irvine Co.

Bren’s lead lawyer, William B. Campbell, would say later during the trial that such an award “would literally bleed this company dry. We can’t pay these people with Monopoly money. These dollars are going to impact the economy of Orange County.”

And anyway, Bren said, the $500-million figure was absurd. In fact, now that he had a majority of the shares, hers were worth even less because he didn’t need them to control the company. The offer, he said in 1987, now stood at $114 million.

What’s more, it was argued, since all these other astute business people--all insiders--had accepted $200,000 a share, then that was all the evidence needed that it was a fair price. Smith, Bren’s lawyers would contend, was a litigious kook rich enough to nurse a 30-year-old grudge against the company in the courts.

If a judge rejected those arguments, the company had its own experts who would swear it was worth only about $1.2 billion in 1983.

When Smith refused his $114-million offer--and refused an offer to double her shares in his new company--Bren was forced to ask the courts in Michigan, where the company is incorporated, to set a fair price. That was the beginning of the Irvine Co. vs. Smith.

Smith’s lawyers would argue that Bren had connived to buy the company on the cheap by misleading his fellow shareholders about the value of the company and stirring up trouble on the board. Her lawyers would also produce prominent experts to testify that the company was worth between $2.6 billion and $3.3 billion when Bren bought it.

Howard I. Friedman, Smith’s lawyer, whose florid language was often the subject of mild kidding between him and Bren’s lawyers, would say in summing up Smith’s case that Bren had scored “the coup of the century” in buying the company at the $1-billion value. Both local newspapers would feature the remark prominently the next day.

A retired judge was hired to hear the case and an office rented in Bloomfield Hills outside Detroit so that the complicated litigation--which was expected to take a year or so--wouldn’t tie up a courtroom.

The Irvine Co. vs. Smith wound up consuming 27,000 pages of pleadings and transcripts; 155 days of trial over three years, and costs to both sides of more than $30 million.

Valuation cases such as this one occupy an arcane corner of corporate law. The problem with putting a value on a private company is that its shares are often only thinly traded or not traded at all, unlike a public company, where all you have to do to learn the value that the market places on a share is to turn to the stock pages of your morning newspaper.

These cases usually arise when a company is sold or an owner dies and the heirs dispute their tax bill with the Internal Revenue Service. The Irvine Co. case was one of the biggest valuation cases on record; few people have the resources to pay lawyers and experts through the lengthy trials that these cases often produce.

Through most of the trial, the experts droned on about complicated and technical methods of valuing real estate. Smith did not testify, although her mother, 84-year-old Athalie R. Clarke--with whom Smith holds the family stock--did take the stand for one day.

She explained why her daughter--at long last--was severing most of the family’s 130-year-old connections to the land. The two women didn’t trust Bren, Clarke said, didn’t think he could run the company on his own and especially doubted his ability to repay the $500-million debt he was heaping on the company in order to buy most of the two-thirds of the company’s shares that he didn’t already own.

“I like Mr. Bren very much as a social friend,” the Irvine family matriarch said primly. Then she added: “But I have very, very inclusive reservations about his corporate management.”

The opinion by Referee Robert B. Webster, released a year after hearing final arguments in the case, also raised some questions about Bren’s actions.

Webster, the retired judge, said that Bren had misinformed Taubman and the others when Bren bought the company. He didn’t tell them an accountant that they were relying on for financial information about the company was actually working for Bren to help him with his buyout.

But, the referee said, he didn’t think it mattered much regarding the price. Instead, the referee believed the company’s experts, who said the Irvine Co. was worth about $1.22 billion in 1983. With some technical changes, Webster upped that to $1.36 billion, which meant that Smith would get $149 million for her shares.

Both sides claimed victory: The amount was, after all, nearly a third more than the $114 million Bren had offered. On the other hand, it was a lot less than the $330 million that Smith was asking for.

The case isn’t yet over, however, and who gets to claim the ultimate victory may depend on the odds and ends yet to be resolved. There is, for instance, the matter of interest on the $149 million over the last seven years. Smith may ask the Michigan courts for up to 18%, since the company has had the use of cash that would otherwise have been in her pocket. So, her reasoning runs, the interest should be predicated on the company’s internal rate of return. Even if the interest isn’t compounded, that could run to nearly $200 million.

The company will insist that a new Michigan law covers the interest issue. That law says that interest should be computed on the basis of the company’s average borrowing rate over the last seven years. That average, say company insiders, is about 9%. That would amount to a little less than $100 million on a simple basis, although the courts will also decide whether interest should be compounded.

Then there’s the question of who should pay the legal costs--which could amount to $30 million. No date has been set for a court hearing on either matter.

Bren was on an architectural tour of Italy when the opinion came down on Monday. Smith--as she has for the last 30 years--attended a meeting of the public board which oversees the supply of water to the Irvine Ranch. True to form, she had a good one-liner for the reporters.

“I don’t intend to let up one inch until I have my money in the bank,” she declared.